Amazon.com, Inc. (AMZN) Prime 'Primed' For Virtuous CycleVW Staff
After completing Baird’s fourth quarterly inventory survey and Marketplace field checks, analysts at the firm have added confidence in their growth expectations and are modestly increasing out-year estimates, driven by strength in Retail (category penetration); Technology (AWS); Media (Kindle ecosystem) and Advertising. They remain constructive on Q4 top picks Amazon.com, Inc. (NASDAQ:AMZN) and Google Inc (NASDAQ:GOOG) on share gains in a mixed retail environment (Comscore +9%). However, with shares up 26% and 24% QTD, respectively, analysts prefer to add to positions on pullbacks.
Key takeaways from Q4 Inventory Survey of Amazon
1) 22 million items are now eligible for Prime shipping (+2% Q/Q)
2) Despite the later start to holiday shopping, we see high levels of “out of stock” present in Home & Kitchen, Electronics, Home Improvement, Appliances, and Health, suggestive of a strong end to the selling season
3) Fastest item-growth categories are Electronics, Cell Phones, Video Games, Industrial & Scientific, and Jewelry
4) Amazon.com, Inc. (NASDAQ:AMZN) App Store now has 145k Android apps – an increase of 20% since Q3 (+120% since Q1).
Plenty of room for Prime expansion
In Baird’s survey, only 11% of all physical items are eligible for Prime shipping – including 25% of media products and just 6% of non-media products. Analysts estimate there are at least 15 million paying Amazon Prime members, and these shoppers typically order 3-4x more units than non-members, with a natural inclination toward buying Prime-eligible products. They see further Prime product availability as creating a virtuous cycle of increasing subscriptions, further category penetration, and greater unit sales velocity.
Uptick in first-party inventory in key categories
The survey indicates that still nearly 90% of products in Amazon.com, Inc. (NASDAQ:AMZN)’s catalog (excluding digital) are listed by third party sellers, including nearly 95% of non-media (long-tail) items.
However, there was a noticeable uptick in Amazon.com, Inc. (NASDAQ:AMZN)’s portion of first-party inventory in specific categories, such as Pet Supplies, Tools & Home Improvement, Appliances, Grocery and Home & Kitchen. Analysts believe these represent categories in which Amazon.com, Inc. (NASDAQ:AMZN) is moving to take greater share.
Analysts maintain an Outperform rating, raising their price target to $425, based on a combination of 30x 2014 FCF estimate and 2x EV/Sales, supported by Baird’s DCF analysis. Analysts note that shares are up 26% QTD (vs. +7% for NASDAQ), and they would be buyers on any meaningful pullbacks.